Larry Faulks (center, in gray) and his supporters are photographed outside his family home during a protest against the foreclosure on Nov. 14.

Photo: Susana Bates, Special To The Chronicle

Larry Faulks (center, in gray) and his supporters are photographed...

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Larry Faulks stands with an unidentified woman Nov. 14 outside the house his parents bought in S.F. in 1962.

Photo: Susana Bates, Special To The Chronicle

Larry Faulks stands with an unidentified woman Nov. 14 outside the...

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Larry Faulks says Wells Fargo committed "dual tracking" by foreclosing on his home during the loan modification process, a practice that will be banned in California starting Jan. 1.

Photo: Susana Bates, Special To The Chronicle

Larry Faulks says Wells Fargo committed "dual tracking" by...

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Larry Faulks is seen outside his home in San Francisco on November 14, 2012. An eviction was suppose to take place but was cancelled for today. DMG Asset Management bought his home from Wells Fargo at a foreclosure auction without Mr. Faulks' knowledge.

Photo: Susana Bates, Special To The Chronicle

Larry Faulks is seen outside his home in San Francisco on November...

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Larry Faulks poses for a photo with what he calls "Art Therapy" in his home in San Francisco on November 14, 2012. An eviction was suppose to take place but was cancelled for today. DMG Asset Management bought his home from Wells Fargo at a foreclosure auction without Mr. Faulks' knowledge.

Larry Faulks says his bank robbed him of over a quarter of a million dollars.

By selling Faulks' San Francisco house at a foreclosure auction, Wells Fargo wiped out all his equity, he said. Unlike most struggling homeowners, Faulks, 59, was not underwater on the home his family bought in 1962; it was worth considerably more than he owed on it.

Wells Fargo says it tried to work with Faulks but couldn't find a way to avoid foreclosure, as his income was too limited.

Outside legal experts who reviewed his case said it highlights how California law doesn't safeguard the rare homeowners with equity in a foreclosure.

"There is a huge gap in the armor that leaves (people with equity) fundamentally unprotected" in foreclosure, said Oakland real estate attorney Charles Hansen, a partner in Wendel Rosen Black & Dean. "In most (foreclosure) cases, the property is over-encumbered so there is no equity for the borrower to forfeit."

Faulks' case also serves as a cautionary tale of how a strong attachment to keeping a house can sometimes work against a homeowner's best interest.

"Home equity is highly illiquid," Hansen said. "The tragedy is, people may say, 'I have $300,000 equity in my home,' but if you cannot get at that equity and don't have the income to service your current debt, it doesn't do you any good. They end up squandering their equity trying to save their equity."

Medical problems

In Faulks' case, after an illness and failed surgery left him too disabled to continue his work as a technical writer, he sought a loan modification on his mortgage, which carried a sky-high interest rate of 8.2 percent.

Once he could no longer afford his payments in spring 2010, he embarked on a two-year quest in which he submitted multiple applications, faxed in reams of paperwork, spent hours on the phone, attended in-person counseling events, contacted politicians, housing counselors and government agencies - all to no avail.

"The bank lost document after document and then claimed I never sent them, and forced me to repeatedly start over," he said.

Faulks received several denial letters, but each time he said he felt there were errors of missing paperwork or incorrect assumptions so he kept applying, hoping to save the home where he's lived since he was 9 years old.

He said he thought he was still negotiating through a counseling agency certified by the U.S. Housing and Urban Development Department when he received a notice in March that the home would soon be sold at a foreclosure auction. Frustrated by his interactions with Wells, he asked the counseling agency to intercede and thought it was handling the matter.

"We really worked with him quite extensively to inform him of his choices," said Vickee Adams, vice president of Wells Fargo Home Mortgage. "Regrettably, despite all efforts, we were not able to find an affordable option for him. This is an example of when customers need to stay very closely in touch with us even if they're working through authorized third parties."

Bargain price

At a foreclosure auction in May, a real-estate investment company called DMG Asset Management bought the house for $705,000.

That was a bargain compared with its apparent value.

The house, built by famed developer Joseph Eichler and on a level lot in Diamond Heights, is surrounded by homes that sell for over a million dollars. Online real estate site Zillow pegs its value at $1 million; DMG's attorney said it's worth $950,000 to $975,000.

Faulks' mortgage was $574,627. After adding in missed payments and late fees, his total debt was $691,914. As is required by law, he was sent $13,086 for the difference between the $705,000 auction sales price and his debt. Wells also offered him $20,000 in relocation assistance.

But that amount is dwarfed by what he might have netted on the open market. If he had sold the home himself for $1 million, he would have been able to pay the bank everything he owed and walk away with a nest egg of at least $250,000.

"The way they did it left me with no money," he said.

Family home

Faulks' parents - his dad was a TV engineer for Channel 4 and his mom was an account clerk for Muni - bought the house when it was brand new.

"My parents bought an Eichler not because of the architecture or to impress anybody," he said. "They bought it because Joe Eichler was the only builder at the time who would sell to black families."

His parents refinanced it when they got divorced. Faulks refinanced again after his mother died so his sister could cash out her share and he could do some needed repairs.

"Rather than modifying the loan and waiting to be paid back over time, the investor can get paid tomorrow" by foreclosing on a house that has equity, she said.

After reviewing Faulks' detailed chronology of his quest, Sitkin said: "Of the third parties helping him, no one seems to have said, 'The reality is you're unlikely to get a modification; the rational thing here is to just sell. The more time goes by, the more equity is eaten away by the (missed payments and penalties) accruing.' "

'Dual tracking'

Hansen, the Oakland lawyer, said California protects the vast majority of homeowners who rack up debt on their homes because after a foreclosure, banks cannot come after them for the unpaid balance. The flip side of that is that the lack of protection for the few who have equity.

Faulks said Wells committed "dual tracking" by foreclosing during the loan modification process, a practice that California will ban Jan. 1. Bank regulators restricted dual tracking during the time in question.

"The foreclosure on Mr. Faulks' home was handled appropriately following all state and local laws," Wells said in a statement.

"Dual tracking is misleading and unlovely but (was) not illegal" at that time, Hansen said.

Faulks is now fighting eviction by DMG, the company that bought the house as part of its business of flipping foreclosures. He said he is living with his belongings in boxes, in anticipation of the sheriff's knock at the door.

In a statement, DMG said it had offered Faulks "cash for keys" as well as the chance to buy back the house for what it paid plus its ongoing costs. Faulks said he can't possibly afford that.

"It's nerve-wracking," he said. "It's like being in 'Alice in Wonderland.' Left is right, right is up."